How Should History Judge Alan Greenspan?

If you care about finance and markets, you may think that the Fed chairman or chairwoman, not the U.S. president, is the most powerful person in the world. Thus, Alan Greenspan, who held that position longer than anyone else except William McChesney Martin a generation earlier, was arguably the most influential public official in the lifetimes of most readers of this publication. Yet Greenspan’s legacy is tarnished by the suspicion that he should have done more to avoid the asset bubbles of the early 2000s, particularly the housing bubble and crash that decimated the balance sheets of many households. Should history regard Greenspan as a “maestro” who managed the economy to new heights of prosperity or as a blunderer who let the housing crisis, and other simultaneous crises, unfold?

To answer that question, one must first understand Greenspan’s life and the history of his economic thinking. In The Man Who Knew: The Life and Times of Alan Greenspan, Sebastian Mallaby, a British-born senior fellow at the Council on Foreign Relations, provides that understanding. Mallaby has written a magisterial – and very long – biography of Greenspan with a deep emphasis on the economic reasoning behind Greenspan’s decisions. I highly recommend the book.

Alan Greenspan

In his early years, Alan Greenspan was an enigmatic character. A devotee of Ayn Rand and, in the 1950s and 1960s, a member of her cultish group of proto-libertarians, Greenspan – an anti-government rebel – seemed more likely to succeed in academia than as an advisor to six presidents. He made significant contributions to economics as a young man although he did not finish his Ph.D. until he was 50 years old. He was also a moderately successful jazz musician. Not much of a family man – his only long-lasting marriage (to Andrea Mitchell) began at age 72 – Greenspan enjoyed a complex love life that Mallaby details with bemused detachment.

Greenspan not only served Presidents Nixon and Ford and ran the Fed under Presidents Reagan, the elder Bush, Clinton, and the younger Bush, he also ran a successful consulting firm and wrote a popular memoir, The Age of Turbulence. It is impossible to appreciate the economic successes and disasters of the last half-century without understanding Greenspan, his role in public life, and his intellectual history. Mallaby does a brilliant job of covering these issues and shedding light on the way that American economic policy has been made.

Greenspan’s intellectual heritage

The “un-Keynesian”

While the prevailing winds were Keynesian at the time Greenspan was studying economics, he never bought into Keynes’ prescription for an activist government. Greenspan the student worshiped the heroes of America’s golden era of entrepreneurial capitalism: the railroad, steel, and automotive barons of the nineteenth and early twentieth centuries. Only in such an atmosphere of unrestrained growth, he believed, could the economy realize its full potential.

Along with this perspective, which he never abandoned, came a passionate adherence to the libertarianism of Friedrich Hayek, Ayn Rand, and other figures who swam against the Keynesian tide. He would later parlay this set of beliefs into a career of service not only to a series of Republican presidents but, less predictably, to Bill Clinton. Greenspan admired Clinton for his commitment to economic growth above other values often associated with Democratic governance. The Clinton years, in the middle of Greenspan’s five terms as Fed chair, would be celebrated as Greenspan’s triumph, a period when Fed policy and the economy were in almost perfect harmony.